If you’re a homeowner looking to access funds for major expenses—like home renovations or debt consolidation—a home equity line of credit (HELOC) might be the smartest and most flexible solution.
So, how much home equity do you need for a loan? It’s a good question. After all:
- You may have owned your home for just a few years
- You may still owe a significant amount on your mortgage
- You may not know how much equity you need to cover your expenses
How does a HELOC fit into these or similar homeowner scenarios? Just how much home equity do I need to get a HELOC?
The amount of equity you need depends on several factors, including:
- Your lender’s requirements
- Your home’s value
- The amount you want to borrow
Below, we’ll explain how to calculate your home equity, the general requirements for obtaining a HELOC, and how lenders evaluate your eligibility.
What is home equity?
Before diving into how much equity you need, it’s important to understand what home equity is.
Home equity is the portion of your home you own outright, not the portion your mortgage lender loaned you.
It’s calculated as—the difference between your home’s current market value and your outstanding mortgage balance.
For example:
- If your home is worth $400,000 and you still owe $200,000 on your mortgage, your home equity is $200,000.
Equity grows as you pay down your mortgage or as the value of your property increases, making it a valuable financial resource.
How much home equity do you need for a HELOC?
Most lenders require homeowners to have a minimum of 15% to 20% equity in their property before they qualify for a HELOC.
This is because lenders want to ensure borrowers maintain a significant ownership stake in their homes after taking out the loan.
Here’s how this works in practice:
- If your home is worth $400,000, 20% equity means you would need to have at least $80,000 in equity before qualifying for a HELOC.
- This leaves up to $320,000 as your remaining loan-to-value (LTV) ratio—the percentage of your home’s value that lenders are willing to lend against.
Most lenders cap their total loan exposure (including your existing mortgage and the HELOC) at 80% to 85% of your home’s value.
How to calculate your available equity
When lenders determine how much equity you can borrow against, they will calculate your home’s loan-to-value ratio (LTV) or combined loan-to-value ratio (CLTV) if you already have a mortgage.
Loan-to-value ratio (LTV)
LTV ratios are calculated by dividing your total outstanding mortgage balance by your home’s appraised value:
- LTV = (Mortgage Balance ÷ Home Value) × 100
For example, if your home is worth $400,000 and your mortgage balance is $250,000:
- LTV = ($250,000 ÷ $400,000) × 100 = 62.5%
Combined loan-to-value ratio (CLTV)
If you’re applying for a HELOC in addition to an existing mortgage, lenders use your CLTV ratio to determine your borrowing capacity.
This includes your current mortgage balance plus the amount of your desired HELOC:
- CLTV = (Mortgage Balance + Desired HELOC Amount ÷ Home Value) × 100
Let’s say your home is worth $400,000, your mortgage balance is $250,000, and you want a $50,000 HELOC:
- CLTV = (($250,000 + $50,000) ÷ $400,000) × 100 = 75%
Most lenders require your CLTV to stay below 85%, meaning you could borrow up to an additional $90,000 in this scenario.
Factors affecting how much you can borrow
Several factors influence how much home equity you can borrow against and your eligibility for a HELOC.
Your credit score
Your credit score is one of the primary tools lenders use to assess financial responsibility and determine your loan terms.
A higher credit score often results in better interest rates and higher borrowing limits.
While many traditional banks require a minimum credit score of 720–740, HomeEQ evaluates a broader range of criteria, making HELOCs accessible to more homeowners.
Your income and debt-to-income ratio (DTI)
Your debt-to-income ratio (DTI) compares your monthly debt payments to your monthly income.
Most lenders prefer a DTI below 43%, though some may allow higher ratios depending on other factors, such as your credit score and the amount of equity in your home.
Your home’s appraised value
Lenders rely on your home’s appraised value to calculate how much equity you have.
If your home’s value has increased since you purchased it, you may have more equity than you realize, boosting your borrowing potential.
Benefits of using a HELOC
A HELOC offers several advantages over other types of loans, particularly for homeowners with significant equity:
- Lower interest rates: HELOCs typically have lower rates than personal loans or credit cards—because your home is used as collateral.
- Flexible borrowing: Unlike a lump-sum loan, a HELOC allows you to draw funds as needed, paying interest only on what you borrow.
- Tax advantages: Interest paid on a HELOC may be tax-deductible if used for qualified home improvements (consult a tax professional for details).
Why HomeEQ is the best choice for a HELOC
If you’re considering a HELOC, HomeEQ makes the process faster and more convenient than traditional banks. Here’s why:
- Fully digital application: HomeEQ’s 24/7 online platform eliminates any lengthy paperwork or in-person meetings.
- No loan officers: Skip the middleman and take control of your application process.
- Soft credit checks: HomeEQ uses soft pulls, so your credit score won’t be affected when you explore your options.
- Fast funding: Successful applicants can access their funds by the end of the application process.
The best way to discover how much home equity you need for a loan
Understanding how much home equity you need for a loan is the first step toward unlocking your home’s financial potential.]
One of the best ways to discover your home equity options is to reach out to HomeEQ today.
HomeEQ offers a seamless, borrower-friendly experience with a fully digital application process, competitive terms, and fast funding.
HomeEQ makes it easier than ever to access your equity.
